Structural changes, cointegration and the empirics of Thirlwall's law

Abstract

Thirlwall's law establishes a relation between the long-run growth rate, the growth of exports and the long-run income elasticity of imports. The estimation of this parameter requires cointegration techniques, which in turn require a large span of data, thus exposing the estimates to risks of structural changes. While this problem has been recognized in the literature, the evidence produced is still partial, being concerned with a very limited number of countries, and in some respect unsatisfactory. In this paper we fill this gap by assessing Thirlwall's empirical regularity on a sample of 22 OECD countries using econometric techniques that allows for the presence of shift of unknown date in the long-run parameters. The results are generally supportive of Thirlwall's hypothesis and allow us to reconcile and qualify the evidence provided in the existing literature.